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INITIAL DECISION RELEASE NO. 90
ADMINISTRATIVE PROCEEDING
FILE NO. 3-8556
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
____________________________
In the Matter of :
:
NORSUL OIL & MINING, LTD., and: INITIAL DECISION
WAYNE E. FOWLER : June 5, 1996
:
____________________________
APPEARANCES: Sarah A. Smith, Division of Enforcement,
Securities and Exchange Commission
James C. Sargent for Norsul Oil & Mining, Ltd.,
and Wayne E. Fowler
BEFORE: Brenda P. Murray, Chief Administrative Law Judge
The Securities and Exchange Commission (Commission)
instituted this proceeding on November 21, 1994, pursuant to
Section 21C of the Securities Exchange Act of 1934 (Exchange
Act).
I held a hearing in Atlanta, Georgia, on February 8, 1995,
to determine whether the allegations of the Division of
Enforcement (Division) set out in the Order Instituting
Proceedings (Order) are true and to afford Respondents an
opportunity to establish any defenses. The Division called one
witness, Teresa Iannaconi, and introduced 43 exhibits.-[1]-
The Respondents called one witness, Wayne E. Fowler (Mr. Fowler),
and did not offer any exhibits.
On March 23, 1995, the Division filed Proposed Findings of
Fact and Conclusions of Law and a Post-Trial Memorandum, and
Respondents filed a Brief After Trial. On April 11, 1995, the
parties filed reply briefs.
Finding of Fact - Respondents-[2]-
---------FOOTNOTES----------
-[1]- The list of exhibits is Counsel's Exhibit 1.
References to the exhibits are to Div. Ex. __. The index in the
transcript does not list Div. Ex. 15A, Norsul's Form 12b-25
Notification of Late Filing of 1990 Form 10-K, which was
introduced and received at Tr. 12.
-[2]- My findings are based on the record and my
observation of the witnesses' demeanor. I applied preponderance
of the evidence as the applicable standard of proof. I have
considered all proposed findings and conclusions and all
contentions, and I accept those that are consistent with this
decision.
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Norsul Oil & Mining, Ltd. (Norsul) is a Canadian registered
corporation that maintains its only office in Marietta,
Georgia.-[3]- Div. Ex. 8 at 1; Div. Ex. 9. It has three
employees, two in the United States and one in Ecuador. In
addition to Mr. Fowler, Norsul has employed George Ashford (Mr.
Ashford) since 1982. Mr. Ashford, Norsul's secretary and vice
president-finance, prepared the unaudited financials. Div. Ex.
31 at 19-23. The third employee, Antoine M. Habis, is managing
director of Minera Molleturo C. A. (Minera Molleturo), Norsul's
wholly owned subsidiary in Ecuador. Div. Ex. 31 at 23-24.
Norsul's books show Mr. Ashford and Mr. Habis as each earning
$5,000 a month. Div. Ex. 31 at 55-56.
Norsul is a public company whose securities are registered
with the Commission pursuant to Section 12(g) of the Exchange
Act, as such, Section 13(a) of the Exchange Act and implementing
rules require Norsul to file timely reports on certain forms. If
all or any required portion of these reports is not timely filed,
the registrant must file a Form 12b-25 (Rule 12b-25). 17 C.F.R.
240.12b-25. These reports include annual reports on Form 10-K
with audited financial statements (Rule 13a-1); quarterly reports
on Form 10-Q (Rule 13a-13); and current reports on Form 8-K (Rule
13a-11). 17 C.F.R. 240.13a-1, 13a-13, and 13a-11. Annual and
---------FOOTNOTES----------
-[3]- Norsul began on April 26, 1949, when Golden Spike
Oil, Ltd., was incorporated under the laws of the Province of
Alberta. It became Aldina-Leduc Oil, Ltd., on February 28, 1959,
and Norsul on February 17, 1961. Div. Ex. 1 at 1. Earlier
filings put the principal office in Albany, Georgia, which is
where Mr. Fowler moved when he went to work for Norsul. Tr. 105.
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quarterly reports must contain financial statements in accordance
which Regulation S-X, which requires conformity with Generally
Accepted Accounting Principles (GAAP). Tr. 37. Financial
statements that are not in accord with GAAP are presumed to be
misleading or inaccurate. 17 C.F.R. 210.4-01(a)(1).
Norsul's fiscal year runs from May 1 to April 30. It
appears that Norsul's most recent audited financials on file with
the Commission are for 1984. Div. Ex. 27 at 3. Respondents
admit that the charges in the Order are true, specifically that
Norsul did not file:
(1) an Annual Report on Form 10-K for fiscal years 1990,
1992, 1993, and 1994;
(2) audited financial statements with its Annual Report on
Form 10-K for fiscal years 1985, 1986, 1987, 1988, 1989, and
1991;
(3) timely audited financial statements with its Annual
Report on Form 10-K for fiscal years 1983 and 1984;-[4]-
(4) certain of its Quarterly Reports on Form 10-Q since
1989;-[5]- and
---------FOOTNOTES----------
-[4]- Respondents do not dispute the Division's
representation that Norsul has filed its Form 10-K late every
year from 1983 through 1994, and that half of the time it did not
file a Notification of Late Filing on Form 12b-25. Division's
Proposed Findings of Fact at 3.
-[5]- Norsul's most recent Form 10-Q filing was for the
quarter ending January 31, 1993. Tr. 170; Div. Ex. 9. It has
not filed the required quarterly reports for one quarter in
fiscal 1989 and 1993; all four quarters in 1994; and two quarters
in 1995. It was late filing one quarterly report in 1990.
Respondents do not dispute the Division's representation that
(continued...)
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(5) a Current Report on Form 8-K that contained proforma
financial information or audited financial statements for Action
Mining Services, Inc. (Action), a company that Norsul acquired in
1991. Tr. 175-76; Answer at 1 and 4; Div. Ex. 24.
Approximately 4,500 shareholders own the 9.2 million shares
of Norsul common stock issued and outstanding. Div. Ex. 8 at 5;
Answer at 5. Norsul has never paid a dividend. Div. Ex. 8 at 5.
Its activities have been primarily in Ecuador where it has or had
an interest in oil production, real estate, a sugar mill, shrimp
farms, gold mine concessions, and other mineral interests. Div.
Ex. 8 at 1. Norsul's unaudited financials for 1991, 1990, and
1989 show total revenues before costs and expenses of $664,877,
$444,802, and $458,028, respectively. Div. Ex. 8 at F-3. Norsul
represents that it has had no income since June 1992, and that
its only present asset is the gold mining property in Ecuador.
Answer at 5; Tr. 106.
On May 25, 1994, Odin Mining International - Ecuador Branch
(Odin) exercised an option with Norsul's subsidiary in Ecuador,
Minera Molleturo, whereby Odin acquired all the exploitation
rights to the mining area "Campo Norsul". Odin will pay Norsul a
two percent royalty on net gold production. Maximum payment
under the agreement is $2.5 million. Odin projected that it
would pay Norsul royalties of $180,000 in 1995. Div. Ex. 43.
---------FOOTNOTES----------
-[5]-(...continued)
only once did Norsul file a Notification of Late Filing on Form
12b-25. Division's Proposed Findings of Fact at 3.
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Wayne E. Fowler of Albany, Georgia, holds a Ph.D degree in
economic geology from Indiana University. Mr. Fowler has served
as president, chief operating officer and a director of Norsul
since at least 1983. Tr. 129-31. The two other Norsul directors
are Brian P. Cryer, a supervisor at Purolator Courier in Calgary,
and Patricia Cryer, an employee of the Calgary Board of
Education. Tr. 129. Norsul's last board meeting was in 1984 or
1985. Div. Ex. 31 at 24.
Mr. Fowler owns 602,000 shares of Norsul, and has been
associated with the company since 1972. Div. Ex. 31 at 10.
Because of lack of funds, Norsul did not pay Mr. Fowler's salary
in 1987 but he received his full salary of $5,500 a month in
1988. Tr. 162; Div. Ex. 31 at 55-56. In that year, Norsul
purchased a car for his use and paid all costs associated with
the vehicle. Tr. 162-63. Mr. Fowler claims Norsul's Form 10-Q
for the quarter ended January 31, 1992, which shows a note
receivable from him of $125,000 is incorrect.-[6]- Tr. 169-
70; Div. Ex. 9 at F-1. He represents that Norsul has had no
earnings since June 1992 and that he has been paying Norsul's
---------FOOTNOTES----------
-[6]- Trial balance for Norsul as of April 30, 1992,
shows Notes Receivables-Officers as $277,831. Mr. Fowler could
not explain the discrepancy. Exhibit 41; Tr. 53. He claims that
Norsul's trial balances prepared by Mr. Ashford are inaccurate
and just estimates. Tr. 124; Div. Ex. 41 and 42. He is
incorrect. The Division's witness correctly characterized the
trial balance as a listing of all accounts that is "the
underpinning for the financial statement." Tr. 52.
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expenses.-[7]- However, Norsul's trial balance as of April
30, 1992, indicates that it paid $120,000 in Officer Salaries and
$10,000 to a consultant. Div. Ex. 41; Tr. 52-56.
Mr. Fowler is responsible for Norsul's filings with the
Commission; he could have taken steps to bring the company into
compliance; and he makes decisions about using Norsul's
resources. Tr. 132; Div. Ex. 31 at 21-22.
The National Association of Securities Dealers (NASD)
delisted Norsul common stock from NASD's Automatic Quotation
system (NASDAQ) on January 10, 1986, because its Form 10-K filing
for the fiscal year ended April 30, 1985, did not include audited
financial statements. Div. Ex. 8 at 5. Norsul's common stock is
listed in the National Quotation Bureau's "pink sheets."
According to counsel, Norsul's stock is not being
traded.-[8]- Tr. 63, 100-03.
Findings of Law
Investors should be able to rely on the accuracy of
financial reports from a public company with registered
securities. This has not been true for Norsul for some 12 years.
---------FOOTNOTES----------
-[7]- Since 1963, Mr. Fowler has held himself out as a
consultant in the areas of mining and oil and gas exploration.
He had no consulting clients at the time of the hearing, February
1995. Tr. 105-07, 131-32.
-[8]- In 1991, Mr. Fowler indicated that Norsul stock
was valued at about one penny a share. Div. Ex. 44 at 4. Mr.
Fowler claimed at the hearing that forcing the company into
bankruptcy, which he seemed to assume a cease and desist order
would do, would not serve the shareholders' interests because
"the majority of the shareholders are behind me and want to see
if we can pull this company out." Tr. 174.
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Respondents admit and the evidence shows that Norsul violated,
and Mr. Fowler, who directed and controlled Norsul during the
time period at issue, caused Norsul to violate, Section 13(a) of
the Exchange Act and Rules 12b-25, 13a-1, 13a-11, and 13a-13
promulgated thereunder.
The unrefuted testimony from the Commission's Associate
Director for Accounting Operations, Division of Corporation
Finance, a Certified Public Accountant who reviewed Norsul's
filings, is that:
The financial statements in [Norsul's Form 10-K for
1991 and Form 10-Q for the quarter ended October 31,
1992] are grossly inadequate and incomplete and do not
comply with GAAP and there is such inadequate and
confusing disclosure in both the financial statements
as well as the rest of the filings that I am unable to
determine the financial condition of this company.
Div. Ex. 27 at 1, Memorandum from Teresa Iannaconi, March 3,
1993; Tr. 17-52. One very significant departure from GAAP in
Norsul's filings is the absence of a Statement of Cash Flows that
has been required since July 1988. Tr. 35-38.
Norsul has successfully delayed regulatory action which
would put it out of business by representing that it intended to
comply with its regulatory obligations as a public company, but
it has not lived up to its word. For example, Respondents
settled a civil action in 1982 by agreeing that:
Norsul shall timely file its annual and periodic
reports as required under the Securities Exchange Act
of 1934, as amended, and the rules and regulations
promulgated thereunder.
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Div. Ex. 25 at 5.-[9]-
I reject Respondents' defense that Norsul lacked the
financial resources necessary to comply with the law and
regulations.-[10]- The preponderance of the evidence is
that during the time period at issue - 1983 through fiscal 1994 -
Norsul had funds which it could have used to comply with the
securities laws and regulations but it used those funds for other
things.
In August 1989, Norsul received $1.4 million in settlement
of its law suit against Texaco and Gulf in connection with its
two percent interest in oil production in Ecuador.-[11]-
---------FOOTNOTES----------
-[9]- Norsul and Mr. Fowler also agreed not to violate
Sections 5(a), 5(c), and 17(a)(2) of the Securities Act of 1933.
SEC v. Rogers, No. 80-04841-MRP, (C.D. Cal. Final Order entered
March 12, 1982); Div. Exs. 25, 26. The proceeding involved the
sale of unregistered securities referred to as placer gold mining
claims labeled "Gold for Tax Dollars". Id.
-[10]- Norsul maintains that (1) the certified public
accounting firm, Arthur Young, refused to audit its financial
statements for the fiscal years ending April 30, 1985, through
April 30, 1988, and to release Norsul's financial records because
it had an $85,000 claim against Norsul for prior services, (2)
another accounting firm refused to do the audit for 1987 and 1988
because Norsul did not have funds to pay its $10,000 retainer,
(3) another accountant, Alice McLean, quit after working on the
audit in 1990, and (4) another accountant, Stephen Scarano,
undertook an audit for 1989 through 1992 but quit in June 1992.
Answer at 1-3.
-[11]- In 1964, Norsul sold an oil concession it held in
Ecuador to Gulf and Texaco for $100,000 and a two percent
production payment. Norsul claims that the government of Ecuador
imposed an 86 percent tax on its revenues from the two percent
production payment as the result of a Commission action against
Norsul for fraud based on accusations by Texaco and Gulf. In
addition, Norsul claims that Ecuador required that half of the
net income earned from whatever source, including oil, remain in
Ecuador. Norsul refers to funds earned in Ecuador which must
(continued...)
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Tr. 132. Norsul did not use this money to do what it said it
would do seven years earlier. It disbursed $1,196,123 for such
items including:-[12]-
Back salaries $215,000 ($75,000 to Mr. Fowler)
($75,000 to Mr. Ashford)
($65,000 to Mr. Habis)
Reimburse expense 29,500 to Mr. Fowler
Reimburse expense 14,909 to Mr. Ashford
Hospital expense 26,200 to Mr. Ashford
Diners Club 4,581
Daumineraux Ltd. 92,500
Daumineraux washout 150,000.
Norsul then was left with $216,697 which it could have used for
an audit but it did not do so. Div. Ex. 35; Tr. 59-61.
Despite Norsul's claims, I question its good faith efforts
at achieving compliance because of the number of disquieting
discrepancies that are in the record. For example, the unaudited
financial statements which Norsul filed with the Commission
either omit information or provide material false and misleading
information. Mr. Fowler, who worked with Mr. Ashford on the
numbers and wrote the text in the financial statements and
filings, testified that most of Norsul's investments in French
Guiana occurred prior to 1984. Div. Ex. 31 at 21, 75-77. He
could not explain why Norsul's unaudited financials for fiscal
1990 and 1989 show investments in French Guiana of $613,272 and
---------FOOTNOTES----------
-[11]-(...continued)
remain in the country as restricted funds. Tr. 109-11; Div. Ex.
8 at 1.
-[12]- Mr. Fowler's explanation that the disbursement of
$92,500 to Daumineraux Ltd. and the disbursement of $150,000
identified as Daumineraux washout was a repayment to investors,
has no support in the record. Tr. 59, 142-45.
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"($160,564)," respectively. Tr. 156-57, 160-62; Div. Ex. 8 at F-
5.
The reviewer from the Commission's Corporation Finance
Division found Norsul's 10-K for 1991 deficient in many, many
respects, including the investment in French Guiana and why it
was written off. Tr. 41-42, 45. In addition, Norsul's 10-K for
1991 showed current liabilities exceeding current assets. Tr.
44. In these circumstances, Item 303 of Regulation S-K required
Norsul to disclose in its filings information about the company's
liquidity, capital resources, and results of operation in
Management's Discussion and Analysis of Financial Condition and
Results of Operation (MD&A). 17 C.F.R 229.303. Norsul's MD&A
was totally inadequate and contained virtually no information of
any value. Div. Ex. 27 at 2; Tr. 42-48. Mr. Fowler was
responsible for the MD&A section of Norsul's filings. Tr. 132.
Norsul represented in its 1991 Annual Report that it began
limited production from its alluvial gold deposits-[13]- in
Ecuador and expected to be in full production by September 1991.
Div. Ex. 8 at 3. It represented in its quarterly report for the
period ended January 31, 1993, that the gold property located in
Ecuador "will be put into production as soon as investors are
located." Div. Ex. 9 at F-5. Mr. Fowler's explanation for the
apparent contradiction - that Norsul had two gold properties in
Ecuador, a hard rock mining property and an alluvial, or
---------FOOTNOTES----------
-[13]- An alluvial gold deposit is a site where gold is
deposited by river flows. Tr. 106.
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secondary deposit, property and Norsul began production in 1991
from the latter site - has no support in the record.-[14]-
Tr. 126-27, 157-60.
Norsul did not plausibly explain why the revenues before
costs and expenses as shown on the unaudited financials -
$664,877 in 1991; $444,802 in 1990; and $458,028 in 1989 - did
not result in funds that were available for an audit, or why
selling, general and administrative costs were approximately
$600,000 in each of those years. Div. Ex. 8 at F-3; Div. Ex 31
at 55-57; Tr. 146-49. Contrary to Mr. Fowler's suggestion,
Norsul's financial statements do not include the results of its
activities in Ecuador on a consolidated basis, rather the
company's investments were accounted for on the equity method and
the amounts shown are in United States dollars. Tr. 87-88; Div.
Ex. 8 at F-7; Div. Ex. 31 at 64-67. The reviewer from the
Commission's Division of Corporate Finance had no reason to
believe that the revenues shown did not represent cash receipts.
Tr. 32.
Finally, the evidence is that when its priority should have
been complying with the federal securities laws and regulations,
Norsul instead used money for other things, such as an investment
in Action Mining.-[15]- Norsul's Board on January 10,
---------FOOTNOTES----------
-[14]- Odin's option is reportedly on the alluvial
property. The hard rock property was returned to the owners when
Norsul could not get the necessary permits. Tr. 126-27.
-[15]- Norsul acquired one hundred percent of the stock
of Action Mining Services, Inc., by issuing 1.5 million shares of
(continued...)
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1990, agreed to loan Action Mining up to $125,000 and agreed to
pay three of its officers a total of $156,000 annually. Div. Ex.
36. Norsul admitted investing at least $80,000 in Action Mining
from funds in the United States. Div. Ex. 31 at 50, 59-61. Mr.
Fowler estimated the total investment at more than $200,000. Id.
Norsul's trial balance as of April 30, 1992, indicates that it
had funds that it was allocating to various purposes. Tr. 52-57.
Inexplicably, after detailing why Norsul could not get funds out
of Ecuador, Mr. Fowler attempted unsuccessfully to justify
Norsul's 1990 investment in Action Mining as an attempt to
"leverage" these restricted funds to pay for the audit. Tr. 181.
Norsul's answer in this proceeding states that pursuant to
the terms of the contract with Odin, Norsul will receive
approximately $2.5 million. Answer at 5. However, according to
Odin's representative, $2.5 million is the "total upper limit" of
the contract, the estimated life of the deposit is three years,
and Odin's estimated 1995 payment to Norsul based on production
is $180,000. Div. Ex. 43.
I find it appropriate to issue a cease and desist order
against Norsul and Mr. Fowler, and to order the remedial action
proposed by the Division because Norsul has violated Section
13(a) of the Exchange Act and rules thereunder, Mr. Fowler has
caused the violations, and there are no mitigating circumstances.
Order
---------FOOTNOTES----------
-[15]-(...continued)
treasury stock. Div. Ex. 8 at 1. It reversed the transaction in
1992. Div. Ex. 31 at 63-64.
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Pursuant to Section 21C of the Exchange Act, I ORDER that:
1. Norsul Oil & Mining, Ltd., and Wayne E. Fowler
cease and desist from committing or causing any present
or future violations of Section 13(a) of the Exchange
Act and Rules 12b-25, 13a-1, 13a-11, and 13a-13
promulgated thereunder;
2. within 30 days of the date this Initial Decision
becomes final, Norsul Oil & Mining, Ltd., shall retain
the services of an accountant approved by the Division
of Corporation Finance; and
3. within 90 days of the date this Initial Decision
becomes final, Norsul Oil & Mining, Ltd., shall take
steps, in the absence of any exemption, to comply with
the reporting provisions, rules, and regulations of
this Commission pursuant to Section 13(a) of the
Exchange Act and the rules promulgated thereunder.
This order shall become effective in accordance with and
subject to the provisions of Rule 17(f) of the Commission's Rules
of Practice, 17 C.F.R. 201.17 (1995). Pursuant to that rule,
this initial decision shall become the final decision of the
Commission as to each party who has not filed a petition for
review pursuant to Rule 17(b) within 15 days after service of the
initial decision upon that party, unless the Commission, pursuant
to Rule 17(c), determines on its own initiative to review this
initial decision as to a party. If a party timely files a
petition for review, or the Commission acts to review as to a
party, the initial decision shall not become final as to that
party.
______________________________
Brenda P. Murray
Chief Administrative Law
Judge
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Washington, D.C.
June 5, 1996